Reading the Tea Leaves

Anyone invested in the market since pre-March 2009 has to be ecstatic - we've recouped our losses, and then some, on the Dow, and the S&P is not far behind. The bulls think it could go even higher, and bears, well, there will always be bears.

While the economy is improving, as witnessed by the surprisingly high number for retail sales released this week and consumer sentiment on the rise, a high stock market doesn't necessarily signal strength.  We maintain that investors seeking yield cannot get it in traditionally risk-averse areas like bonds, and are being forced to increase their portfolio's risk by chasing higher-performing stocks. 

Having drunk the Black Swan Kool-aid, and forever on the lookout for what could trigger another one, I recently saw a piece on Briefing.com that suggests we may want to monitor margin activity, particularly as it pertains to managing risk.  After all, if you see the black swan circling, you have time to duck for cover.

According to the report published March 11, 2013, January's margin debt was the highest since January 2007, and we all know how that year ended.   Also, there is a $77.2 Billion deficit in the margin account credit balance, suggesting that meeting margin calls could be dicey.  Further, the last time there was such a significant margin deficit was in the spring of 2011, just prior to a 19% correction.

All of this suggests strong speculation in the market, fueled in part by increased confidence in the economy, but also signaling that there is a significant increase in market risk.  Should there be something that comes out of left field that induces selling, then forced liquidation of stocks to meet margin calls (since cash is not available) could cause a sell off.

Black swans don't come around all the time, but when they do, they can be deadly.  Protecting your portfolio from that kind of shock means being willing to settle for lack-luster yields in what seems like a boring bond market.  But it won't be so boring should the market suffer a correction.  At the very least, some exposure to bonds will give you a safety net, and placing the equity portion of your portfolio in relatively safer dividend-yielding stocks is a smart way to position yourself for what could be a bumpy ride. 

You can read the full report at:

http://www.briefing.com/investor/our-view/the-big-picture/margin-debt-rises-into-thin-air.htm

FrackNation

While lunching recently with an old boyfriend (one of the few liberals with whom I can engage in friendly political sparring), we were discussing the ailing economy (on which we both agreed) and debating the merits of more stimulus for the economy (on which we did not).  He made, however, what I thought was a poignant observation, that our country needs another “new thing” to get things moving again. While he and I are destined to stay on opposite sides of the aisle, his comment resonated.

Harking back through our economic history, America has experienced booms and busts throughout.  The railroads, the roaring twenties, the influx of returning World War II veterans and the demand for housing, products and services, the oil boom, the dot.com rush, and the credit-fueled real estate market are but a few examples. Each of these made millionaires out of mere minions (as well as fattened corporate coffers).  And each was followed by a severe bust.  We still are suffering from the last one, leaving an overhang that we cannot seem to shake.  

What does this have to do with finance you may ask (since this blog deals with financial issues)?  If we can unharness the gas companies and let them drill safely, it could be as meaningful as the gold rush.  Being the low-cost producer in any business is an important advantage.  The US has the potential to produce and export natural gas, with untold benefits for the global marketplace, and potentially rich returns for investors.  Reducing our dependence on foreign oil is one natural outgrowth.  Slashing the cost of energy is another, as families struggle to pay heating bills.  Stories abound about the economic boom in Williston, North Dakota, where jobs are plentiful and housing scarce.  There is even news for single women:  the ratio of available guys to gals is 95:1.  You go girl!

While I have no intention of moving to North Dakota, I believe, as do others, that the burst in natural gas exploration and production could be our “next best thing” and  make the mid-west the next emerging market (according to Jason Trennert, of Strategas Research Partners LLP), with untold opportunities for global investment, trading and profits. 

But not everyone agrees.  Many media outlets have exposed the problems—primarily, water contamination-- and the recently produced Gasland documentary is an example. Like any hot debate, tempers flare on both sides.  Fracking is the enemy of all who seek pure water and cancer-free health.  At dinner parties country wide, lively discussions ensue on the need to curb corporate excesses caused by irresponsible fracking.

There are others, however, who have a different opinion.  FrackNation, a new documentary which I just saw in Manhattan last night, depicts a distinctively opposite view, and every responsible American should take the time to see it.  While no one can deny, with a straight face, that corporations have not always acted responsibly when it comes to the environment, it is also true that having their collective feet held to the fire has forced necessary changes in regulation and responsibility, with demonstrable, concomitant changes in behavior.  

(Remember the Hudson River, anyone?)  One of the funnier scenes in the film shows the mound of required tests and studies that are required before a single drill bit can enter the ground.  

Currently playing at The Quad Theatre on 13^th Street in Manhattan, FrackNation also airs next week on local TV.  If, indeed, natural gas holds the potential for helping us out of the economic doldrums, we all need to be informed. In evaluating any investment, it’s imperative to calculate both the risks and rewards.  Go see FrackNation.  It is rare to be given a chance to view both sides of a hotly contested issue, and it’s a compelling antidote to the hysteria surrounding the issue of fracking.  Funded not with corporate dollars, but with Kickstarter, a grass-roots funding program for creative projects, the less-than-$300,000 production price tag was financed with investments of sometimes just a dollar by those interested in getting out their side of the story.  Go to http://fracknation.com/ for more information and to check local TV listings.